Spreading the Wealth Around

Lately it seems I’ve been hearing more and more about the idea of spreading the wealth. More and more people are complaining that there is too great a disparity in this country between the top “quintile” (20%) and the bottom “quintile”. I wondered if there is anything more to this argument than fairness, and the reflex reaction that it must somehow be wrong that the top 20% of people in this country control over half of the wealth. I read and read. While I haven’t yet reached a conclusion, I found out a whole lot of interesting things.

There is an actual measurement called Gini, which is an indicator of the wealth disparity within a country. If a country has a high Gini, the top quintile owns a larger share of the wealth than if the country has a low Gini. The countries with the highest Gini’s in the world change every year, but usually are poor, third-world countries. This would tend to favor the argument that a larger wealth disparity creates a poor country, or keeps it poor.

However, as I read and read about the various countries on the Gini scale, I found out a lot of other interesting things. Among the countries that have a very low Gini (meaning they are “good” and share their wealth more equitably), they are about equally divided among rich and poor countries. The Scandinavian countries are quite wealthy, but other countries with similar Gini scores include Ethiopia and Pakistan. Clearly some other things must be operating here. Gini alone doesn’t create wealth.

Countries I would expect to have a low Gini score would be countries which have had communism for 2 or more generations. I was surprised to find out their Gini scores were higher than ours (Russia and China). Some of the old Soviet satellites had low Gini scores, but remain very poor, i.e., Slovakia.

In a country with a low Gini (remember, this is good and means more equitable sharing of the wealth), you may have a very high cost of living—or not. You may have a very high Gross Domestic Product (GDP) per capita—or not. We have a higher GDP per capita compared to Sweden and Denmark, while their Gini score is lower than ours. One thing you will likely have with a low Gini score is much higher taxes and a lot more government intervention into people’s personal finance i.e., the Scandinavian countries. After all, the top quintile isn’t likely to give away its wealth to the lower quintiles voluntarily, so the government must coerce it to do so with its tax laws. I wondered if the high tax rate on the wealthy and the sharing of the wealth would increase growth. After all, sharing the wealth is supposed to put more consumer spending into the economy. However, while some of the more equitable (low Gini) economies have higher growth rates than ours, most do not. Denmark has a very low growth rate right now. Interestingly enough, in those wealthier economies which have established a more equitable distribution of wealth, the birthrate has plummeted, and now the country is in deep trouble as it tries to provide social services for an aging population which isn’t producing as much wealth.

I wondered if there is a cut-off on how much you can tax the top quintile. I looked at the top hundred wealthiest people in the world, and they are generally owners of big business. People who want to spread the wealth around tend to see big business as the enemy, yet it truly is the goose that lays the golden egg in terms of producing wealth and jobs for the country. We don’t want to kill our golden goose for spite. Yet, if we take money from the “rich” that would have been used for more business creation and gave it to people who would buy more consumer goods, which is better for the country, for how long, and where is the tipping point? Kind of important to know, I would think.

Two points in closing. As the mom of adult kids, I can see the envy of an eighth grader toward her high school senior sibling, who through hard work and a couple of awards managed to amass several thousand dollars to be used toward college. The eighth grader would love to have some of that money for a new laptop. The eighth grader isn’t currently able to earn or save any such amount of money. What would be the wisdom of taking some of the senior’s college money and giving it to the eighth grader to be fair? I don’t know. You answer that one.

The second thought is that the countries with the highest Gini, where the wealth is spread around pretty well, the standard of living remains high and the government provides a pretty wide and strong safety net, the suicide rates are among the highest in the world. Spreading the wealth doesn’t answer that question either.